Cap Rate or Cash on Cash

[Gilbreth Seno]

For flips, should I use cap rate or cash-on-cash to evaluate a deal? What about for rentals?

[Ross Schneider]

@Gilbreth Seno for flips, you should always use cash-on-cash return or just look at your bottom line ROI percentage. Cap rates are used to evaluate long term buy and holds. Many multi-family companies buy off of a cap rate. They look at what the property is worth, and what their NOI is to determine a purchase price. As far as for rentals, I do know of investors who use cap rates to evaluate deals if they are looking to pick up multiple properties. That being said, I had someone try to sell me two houses last week who said their cap rate was "through the roof!" That being said, after comparing his asking price and ARV, there was only about 5% equity in the deal. Needless to say, the deal didn't work. Also another thing to take into consideration is that banks will not lend on single family homes based on a cap rate. It just doesn't happen, unless you have some crazy relationship with them.